Staffing augmentation.  Labor arbitrage. India. For many, outsourcing seems to be defined only by the above terms – people working for low compensation in locations such as India, helping a business to save significant money.

However, the recent and continuing economic downturn has upset many notions and business models that have been in place for over a decade and outsourcing is no exception. What was once considered to be the norm is now in flux and requires different responses from service providers and customers.

New Call Center Models

Take for instance, the call center. At one time, India was the only market for this service. More recently, however, other markets such as the Philippines and Costa Rica are proving to be proficient in the provision of voice-based customer support services.

More shifts and changes like these are likely to continue. In particular, markets with newer skill sets and technologies are on the rise. Brazil and Russia, for instance, are increasingly emerging as premier destinations for complex engineering and applications activities. And other destinations such as Latin America, appeal to U.S. businesses because they are in the same time zones.  

Furthermore, the overall notion of which countries are the suppliers of IT services and which are the recipients is changing as well. Take the case of Bharti Airtel, one of India’s major telecom companies, or Bancolombia, one of Colombia’s major banks. One of Bharti’s primary growth strategies has been to outsource most of its operational functions and activities to external entities-- including what most other telecom companies across the world would consider to be “core” activities such as network roll out and maintenance, customer acquisition as well as customer support. In this endeavor, U.S.- based IBM has been Bharti Airtel’s major strategic partner, to whom the latter has outsourced a diverse range of business functionalities, including a major chunk of its customer care operations.

In the second case, TCS and Infosys are assisting Bancolombia to transform its technology and infrastructure. Thus, outsourcing today can work across any geography and can be undertaken in virtually any direction – west to east or vice versa, as long as the primary goal of business value addition is achieved.

Rethinking Low Costs

Further, we find that a lot of the assumed low-cost destinations are losing that distinction. Again, take the case of India. With a booming economy and jobs not too difficult to come by, salaries in the country have been continuously witnessing an upward spiral. Year after year, surveys undertaken by Hewitt on salary trends across the world clearly show an upward revision in India. In fact, while salary levels in India grew by an average of 6.6 percent in 2009, this year, salary levels are quite likely to increase by as much as 10 percent , according to a recent study .

Firms looking to outsource their business functionalities to leading and rising destinations like India, China or Mexico need to be wary of macroeconomic conditions or they stand to lose value rather than actually gaining, from the entire exercise.
Along with business value, risk management and risk mitigation definitely begin to play an even greater role as increased operations are outsourced. Any prospective outsourcing destination needs to be assessed at multiple levels. Broadly, these levels could be summed up as:

• Country-level risks

• City-level risks

• Supplier-level risks

Within these risk levels are a broad range of sub-levels that need to be further assessed. Financial risk would of course be common to each of the above three risk levels. And at the country and city levels, aspects such as human resources, infrastructure, and geopolitical risks are paramount before any definitive outsourcing mandate is finalized. In the same breath, if we are to narrow the risks at the supplier level, we could be looking at risks such as strategy, service capability as well as risks arising out of the complex client and service mix that the supplier holds.  

Some businesses aim to mitigate these risks by insourcing, rather than outsourcing key services. We may, therefore, witness the growth of new U.S. locations –where unemployment is high and employees are plentiful-- that could serve as excellent pockets for business-support services. While not competitive with the likes of India-- places such as Omaha or Ann Arbor are increasingly emerging as excellent destinations for outsourcing within the U.S.

In any case, an evolution is under way in the relationships between clients and vendors. In the past, the focal point of these relationships had generally been the resources that the vendor had at its disposal. Such a perspective is likely to change in favor of Service Level Agreements that will allow the whole service process, and the service commitment being made by the vendor, to be clearly stated to clients. The shift to the SLA signifies a much needed correction in perspectives. It also implies that niche outsourcing centers, which might do better quality work than their bigger counterparts, now stand good chances of winning quality assignments.

Pricing, one of the most important aspects of outsourcing to most users, is experiencing major modifications as well. The trend is moving away from broad-level, volume-based or even hourly-based pricing mechanisms in favor of transaction based and outcome/gain-share pricing.

Knowledge Management

Across all these initiatives, knowledge management will always play a vital role. The ‘drill down’ approach of the past, where the clients retained the brains and the vendors merely acted as pawns in their hands, will very likely become passé. Instead, the emphasis will be on collaboration and mutual-value addition—what I call ‘collective intelligence,’ whereby clients and vendors come together to apply their thoughts toward the mutual goal of addressing their respective business needs.

How will all this be achieved? Well, for starters, through better deployment and application of technology. I anticipate a great deal of convergence of portfolios, programs, projects and resources as well as performance management. As part of this shift in emphasis, I believe that program management and governance is about to get specialized and outsourced.

In all, a series of changes – in the way outsourcing is perceived as well as practiced—is under way. Eventually, these changes may serve as a guiding light for better business practices as outsourcing matures and the world globalizes even further.

-- Atul Vashistha

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Atul Vashistha is founder and Chairman of Neo Advisory (formerly neoIT), a leading management consultancy since 1999. Neo offers independent advice to enterprises that seek to transform their organizations by outsourcing and globalization. Vashistha is also founder of Neo Group, a firm offering solutions for managing, monitoring and improving supply relationships. His latest venture is BestOutsourcingJobs.com, an online employment solution focused on outsourcing careers. He is a member of Smart Enterprise Exchange and can be reached on this site.

1 Results of Hewitt Associates survey as seen on MoneyControl.com